MUMBAI: The Canteen Stores Department (CSD), which runs retail stores for India’s defence forces, will get a refund of 50 per cent of the goods and services tax (GST) paid from the states and the Centre. This follows CSD having suspended orders this month to avoid tax payout disparities ahead of the goods and services tax (GST) that’s set to be rolled out on July 1.
“CSD will pay full GST and 50 per cent of the total tax would be refunded by state and the Centre,” union finance minister Arun Jaitley had said on Saturday after the GST Council meeting.
For most consumer product companies, CSD, also known as the Army Canteen, is the largest buyer, accounting for 5-7 per cent of volume. CSD had asked all depots to suspend orders in a May 31 letter. “In view of the GST implementation, LS (local supply) Orders to be placed for supplies during June 2017 are suspended till further orders,” said the letter, which ET has seen. Local supply orders, or direct supplies, typically have deliveries scheduled 21days from the date of the order.
CSD’s retail outlets have an annual revenue of more than Rs 14,000 crore.
The outlets sell 5,300 products ranging from biscuits and beer to shampoos to 12 million consumers comprising army, navy and air force personnel and their families as well as ex-servicemen and their kin. They have more than 600 suppliers that provide products such as toiletries and cosmetics, household goods, footwear and accessories, food items, stationery, electronics, consumer durables, liquor and vehicles.
Five years ago, FMCG companies took a sales hit of 5 per cent on average during temporary destocking at CSD due to renegotiation of terms of trade. Several companies have said that destocking of inventory is occurring across trade channels as the date of GST implementation draws closer.
Most food, home and personal care categories, including biscuits, toothpaste, soaps and hair oil, will be taxed at 18 per cent under GST compared with about 22 per cent in the current indirect tax structure of excise duty and value-added tax (VAT). However, detergent, shampoo and skin care will have a higher tax of 28 per cent. GST laws include an anti-profiteering clause requiring companies to pass on the benefits of lower taxes to the consumer.
Hindustan Unilever, at an analyst meet on Friday, said growth is likely to be impacted by temporary thinning of trade pipelines, but the company will compensate customers appropriately and is awaiting the final transition rules to further fine-tune its response.
To counter destocking by distributors, companies such as Colgate-Palmolive, Godrej, Hindustan Unilever and Dabur are giving out higher commissions to the trade to push stocks before July 1.
“We will be supporting our distributors and trade partners for smooth transition to GST by helping them liquidate their transition inventory, while ensuring that there’s no loss of sale at the retail level,” Dabur India Ltd chief financial officer Lalit Malik said.
Analysts said destocking is taking place to maintain compliance on transition stocks and that clarity is needed on the matter. “While CSD is an important channel for most FMCG companies, the impact can’t be gauged as several companies are trying to convince the trade that they will take the hit on their books,” said Edelweiss Securities senior vice president Abneesh Roy.
Consumer demand peaked in the March quarter, recording the highest sales growth in daily groceries, and home and personal products in the last two years, a Nielsen report indicated. The recovery followed a quarter of muted sales due to the currency swap in November that had curtailed the purchasing power of rural households using cash to buy shampoos, soaps, or packaged cookies.
“There will be no impact on consumption or actual demand due to GST but the trade might not push products as aggressively. So, we need to incentivise the trade to keep the growth momentum on,” said B Krishna Rao, deputy marketing manager at Parle Products.